Requests for changes in accounting methods made easier.

• Author: Sherman, W. Richard

With the issuance of Rev. Proc. 97-27, the procedure for requesting a change in accounting method has been made much easier than was formerly the case under Rev. Proc. 92-20. The new revenue procedure eliminates much of the old procedure's complexity. Gone are the distinctions between impermissible (Category A or Designated A) and permissible (Category B or Designated B) accounting methods with their differing Sec. 481(a) adjustment periods. Also eliminated are the many rules regarding the time in which a request for change in an accounting method (Form 3115, Application for Change in Accounting Method) can be filed. This simplification is effective for Forms 3115 filed on or after May 15, 1997, with a transition period that allows taxpayers to still take advantage of some potentially favorable aspects of Rev. Proc. 92-20.

Accounting Method Changes

Changes in tax accounting methods affect when a taxpayer reports income or takes a deduction. Accounting method changes do not include corrections of mathematical, posting or computational errors, but do include changes that do not "permanently affect the taxpayer's lifetime taxable income," if the change could affect the year in which the taxable income is reported. For example, a change in accounting method would arise if a taxpayer changes the treatment of a receipt from a customer from recognizing the cash as an item of income to treating this receipt as merely a deposit with no current income recognition. Because of the potential timing differences, if a taxpayer wishes to change its accounting method, it must first receive IRS consent. This is done by filing Form 3115, requesting permission for the change; this filing (and its concomitant $900 user fee) is not necessary when the Service has provided an automatic procedure. In deciding whether to approve the proposed change, the IRS considers whether the new method will create or shift profits or losses between the businesses the taxpayer operates, as well as whether the method will clearly reflect income.

Who Can File Form 3115?

Generally speaking, any taxpayer can request a change in its accounting method. However, if the taxpayer is already under examination by the Service, this request will generally be rejected. (For purposes of filing Form 3115, "under examination" means that the taxpayer has been contacted in any manner by the Service for the purpose of scheduling any type of examination of any of its Federal income tax returns.) In...